Power Integrations, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter filing; quarterly figures below are unaudited. The company designs analog and mixed-signal ICs and other components for power conversion, including AC-DC supplies and high-power IGBT drivers.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $344.0 million | $348.8 million | Down 1.4% |
| Gross profit / margin | $173.4 million / 50.4% | $189.6 million / 54.3% | Margin down 3.9 percentage points |
| Operating income / margin | $39.0 million / 11.4% | $55.8 million / 16.0% | Down 30.1% |
| Net income | $39.1 million | $59.5 million | Down 34.3% |
| Diluted EPS | $1.32 | $1.93 | Down 31.6% |
| Cash from operations | $92.2 million | $85.6 million | Up 7.7% |
FY2015 net income margin was 11.4%, versus 17.1% in 2014. The filing attributes lower gross margin mainly to a less favorable end-market mix and CamSemi-related intangible amortization and inventory write-up costs. Operating expenses were $134.4 million, up slightly from $133.8 million, including higher R&D and acquisition-related staffing costs.
Q4 2015: Revenue was $87.3 million, compared with $86.6 million in Q4 2014. Gross profit was $42.9 million (about 49.2% margin), versus $45.8 million (about 52.9%). Net income was $12.7 million, versus $14.4 million; diluted EPS was $0.44, versus $0.48.
Liquidity, debt, and capital allocation
- Cash, cash equivalents, and short-term marketable securities totaled $173.9 million at year-end, versus $175.3 million in 2014. Working capital was $188.4 million, down from $210.8 million.
- No borrowings were outstanding under the $100 million revolving credit facility, which expires April 1, 2017. Long-term liabilities were $6.9 million; the filing reports no funded debt outstanding.
- Operating cash flow was $92.2 million. Investing activities used $7.7 million; financing activities used $55.1 million, including $53.7 million of share repurchases and $13.9 million of dividends.
- The company repurchased 1.3 million shares in 2015 and had $30.0 million remaining under repurchase authorizations at year-end. The board declared quarterly dividends of $0.13 per share for 2016, subject to its discretion.
- Management believes cash from operations and existing liquidity will cover working-capital and other cash needs for at least the next 12 months.
Changes, outlook, and notable items
- Revenue fell by $4.8 million year over year. Lower computer and industrial sales were partly offset by communications growth, including InnoSwitch charger sales and the CamSemi acquisition. Communications rose to 24% of revenue from 18%; computer declined to 7% from 10%.
- Revenue remained concentrated: distributors accounted for about 75% of product sales; Avnet represented 21% of revenue and Powertech Distribution 10%. International sales were approximately 95% of revenue.
- The January 2015 CamSemi acquisition broadened the low-power product portfolio. Total consideration was approximately $23.3 million. The company also purchased an adjacent San Jose building for $10.4 million.
- No specific revenue or earnings guidance is provided. Management cites expansion into additional applications and demand for efficient power conversion as growth opportunities, while noting the market’s modest underlying growth and competitive pricing pressures.
- The 2015 effective tax rate was 0.7%, compared with a 4.8% tax benefit in 2014. The prior-year benefit included a one-time IRS audit settlement benefit of approximately $3.3 million; 2015 benefited from earnings in lower-tax jurisdictions and R&D credits.
- Litigation: In December 2015, a jury awarded the company $139.8 million in damages in a Fairchild patent case. The award was subject to post-trial proceedings and challenge; the company recorded no benefit and could not estimate the amount it might ultimately recover. In a separate case, a jury awarded Fairchild $2.4 million against the company; the company recorded no loss, citing its defenses. Management warns that ongoing patent litigation is costly and outcomes are uncertain.
- Key risks include volatile demand and short-term cancellable orders, customer and distributor concentration, price competition, reliance on three wafer foundries, foreign-exchange exposure, international-market dependence, product-development execution, and litigation. A 10% U.S. dollar move against the yen could affect gross margin by approximately 0.8–1.0%, all else equal.
- Management and the auditor reported effective internal control over financial reporting as of December 31, 2015. The financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether the lower gross margin and operating profitability persist, and whether end-market mix or demand improves.
- Progress and financial contribution from CamSemi, including acquisition-related amortization and integration costs.
- Developments in Fairchild and other patent proceedings, especially the status and collectability of the $139.8 million verdict and any potential company liability.
- Distributor inventory, price-adjustment claims, customer concentration, and the reliability of sell-through reporting.
- Wafer availability and supplier agreements, foreign-exchange effects, and the company’s ability to sustain cash generation, dividends, and repurchases.
- Tax exposures, including $13.6 million of unrecognized tax benefits and approximately $222 million of foreign earnings designated as indefinitely reinvested abroad.